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Property auctions are often regarded as a good gauge of the rest of the market. The Hungry Ghost Month this year (July 31 to Aug 28) was especially telling (see Chart 1). It was spooked not so much by traditional superstition, but by the ghosts of past financial crises — the Asian financial crisis of 1997/98 and the global financial crisis of 2008. Turnout was noticeably thinner compared with earlier this year, according to auctioneers.
Only 34 properties were put up for auction sale in August, which was the lowest number seen in 14 years, since the Hungry Ghost Festival of 1998, in the midst of the Asian financial crisis, observes Grace Ng, deputy managing director and auctioneer at Colliers International. In 1998, only 29 properties were put up for sale, and two were sold for a total of S$1.66 million.
This August, there was only one transaction, and it was a double-storey five-bedroom terraced house at Da Silva Lane, off Upper Serangoon Road. The mortgagee sale fetched S$1.66 million at DTZ’s auction on Aug 24.
The good news is that in stark contrast to the crisis of 1998, when mortgagee (or foreclosure) properties outnumbered owners’ sales, this time around, there were only two mortgagee sales of the 34 properties put up for auction sale. The rest were owners’ sales, says Ng. The majority of the sellers who put their properties up for auction sale also stuck to their asking prices. “There were some who had put up their residential properties for auction two or three times, but with no change in their asking prices,” she adds.
Sellers would rather withdraw their properties from the market if they could not achieve their target prices, and put them up for rent instead, notes Ng. This is because rental returns are still good, at 2% to 4% for residential properties, she estimates, which is “still higher than placing your money in time deposits which earn less than 1% return”. With interest rates at the current low levels, owners are also able to service their home mortgages quite comfortably. “As such, there isn’t a trend of fire sales yet,” says Ng.
Property buyers, on the other hand, are holding back on their purchases now, spooked by the spectre of a double-dip recession, she observes. “Because of the global stock-market correction, on top of the recent European debt crisis and US debt-rating downgrade, the commercial and industrial sectors that were the star performers this year were affected last month,” she adds. “This is because sellers have held back from putting their properties up for sale, while most buyers and investors have adopted a ‘wait-and-see’ attitude.”
Mary Sai, auctioneer and executive director at Knight Frank, agrees. What’s more, “a lot of buyers are under the impression that there will be a lot of distressed sales on the market,” she says. “The climate now is similar to the period during the global financial crisis in 2008, when people had expected to see a lot of distressed sales and were betting that prices would fall so they could get bargains, but that didn’t happen.”
Mortgagee sales still outnumbered by owners’ sales
That hasn’t stopped potential buyers from making lowball offers at property auctions, resulting in many properties being withdrawn from auctions and dismal sales recently.
During the Asian financial crisis and even the recession of 2002 to 2004, mortgagee sales far outnumbered owners’ sales at property auctions. Colliers International Research has tracked auction sales during the Hungry Ghost Festival for the past 13 years. From 1998 to 2006, the number of mortgagee sales offered for auction sale far exceeded owners’ sales (see Chart 2). The trend only started to reverse from 2007, when the property market recovered. Since then, mortgagee sales have dipped significantly. And for the past four years, owners’ sales have dominated auction sales.
Even the global financial crisis of 2008 saw few mortgagee sales, partly because it was short-lived and also because banks preferred to let owners handle the sale of their own properties, notes Knight Frank’s Sai. “Banks do not want to be caught in the same situation they were in after the 1998 crisis, when they were left holding onto assets for many years and were unable to achieve the prices they wanted,” she says.
In the current market uncertainty, there hasn’t been a spike in mortgagee sales yet. “At the end of the day, people are saved by the current low interest rates and low unemployment levels,” notes Sai.
But buyers remain wary and are watching the stock market very closely, she adds. “The stock market is very volatile. The fear now is that if there are margin calls, some of these owners would have to sell their properties to meet repayments.”
More properties available by private treaty
The number of properties offered by owners for auction sale also dropped in August. Sai says there is an increased reluctance in sellers to list their properties for auction for fear that they would be perceived as “desperate sellers” or that their assets are distressed. “While there are those who still believe that auctions are an ideal platform to showcase their properties, some of the stigma associated with property auctions in the past has returned,” she explains.
The list of properties for auction sale has been reduced, but the flip side is that the list of properties offered for sale by private treaty has lengthened. Higher-value properties such as Good Class Bungalows (GCBs) or well-located commercial properties that had headlined last year’s auctions are now either put up for tender or offered for sale by expressions of interest instead, notes Sai.
Even before the recent uncertainty, the auction market had been hit by the anti-speculation measures introduced by the government in the residential sector in January. This led to investors switching their attention from residential to commercial and industrial properties instead. Total sales achieved at auctions for the first eight months of this year amounted to S$80.4 million, which was about a third of the S$223.9 million achieved last year, according to Colliers. The expectation is that total sales for 2011 would exceed S$110 million.
Ng believes that when market conditions improve and the market stabilises, owner-occupiers and investors will continue to buy properties in anticipation of long-term capital appreciation and stable returns, especially as they are still seen as a good hedge against inflation.
She says commercial and industrial properties will continue to be a favourite with property investors, as these two asset classes have shown stable returns in the range of 4% to 7%, on top of a higher loan-to-value ratio (70%, compared with 60% for those buying a second or third residential property and servicing an existing mortgage). Moreover, there is the exemption of seller’s stamp duty (which is levied on sellers of residential property within the first four years of purchase).
The luxury residential sector, on the other hand, is showing signs of slowing down, says Ng. Sales of high-end properties at auctions this year are unlikely to be as buoyant as in 2010, which saw four GCBs sold for a total of S$57.44 million. “Nonetheless, sales of other landed properties such as terraced houses or smaller detached houses are expected to continue to do well, owing to buyers’ desire to own landed properties in land-scarce Singapore,” she adds.
Cecilia Chow is the editor of City and Country at The Edge Singapore
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 875, Sep 12-18, 2011
